An effort by Caterpillar(NYSE: CAT) to help the railroad industry stem its emissions got a boost Friday, and its stock price is going along for the ride. Shares of the heavy equipment manufacturer were up by 3% as of 2 p.m. ET after Canadian National Railway(NYSE: CNI) announced the purchase of its first hybrid mainline locomotive.
Charging into a new market
Caterpillar is best known for its massive construction and mining machines, but for nearly a decade, it has also owned Progress Rail Services. On Friday, Progress announced the sale of a hybrid diesel/battery electric locomotive to Canadian National.
The railroad intends to test the locomotive on its mainline British Columbia track to gauge whether the technology is a suitable replacement for at least a portion of its existing fleet. The industry is seeking to better understand how hybrids will hold up in harsh winter conditions, where batteries typically underperform, and determine their ability to tow heavy loads through mountainous terrain.
The purchase is another big win for Progress Rail, following Union Pacific's purchase of 10 battery-electric locomotives back in 2022.
Is Caterpillar a buy on its railroad news?
These are early days for Progress Rail, and it will take years for the technology to be validated under real-world conditions, but for Caterpillar investors, there is reason for excitement.
If the tests go as hoped, rail could become another engine for growth inside Caterpillar. Although rail, like mining and construction, is a cyclical industry, those cycles don't always align with each other. Rail sales could help boost earnings for the company during periods when demand for mining and construction equipment is lower.
Railroads have pledged to reach net zero emissions within the next few decades, and they will need to invest massively to get anywhere near that goal. Progress Rail is on a path toward being a big part of their efforts, and investors are understandably excited about the opportunity.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Union Pacific. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.
